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FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

When assessing a sovereign's willingness, as distinct from ability, to pay, which factor would an analyst most likely examine?

Willingness to pay is judged through political stability, institutional quality and past default behavior, because sovereigns cannot easily be compelled to repay. Ratios like debt-to-GDP, reserves coverage and current account deficits mainly capture ability to pay rather than willingness.

  1. AThe ratio of short-term external debt to reserves
  2. BThe political stability, institutional quality and history of past defaultsCorrect
  3. CThe country's current account deficit as a share of GDP
  4. DThe sovereign's debt-to-GDP ratio

Explanation

Willingness to pay depends on political and institutional factors, such as government stability, rule of law and default history, since a sovereign cannot be forced into repayment. The other ratios mainly measure ability to pay through resources and external balance.

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